AMD to Acquire Graphics-Chip Maker ATI
Advanced Micro Devices Inc. said Monday that it would buy graphics chip maker ATI Technologies Inc. in a $5.4-billion deal to press recent gains against industry goliath Intel Corp.
The move expands AMD’s offerings beyond the microprocessors that run computers to include a range of ancillary technologies that will enable the Sunnyvale, Calif., company to sell what are called computing platforms -- basically, integrated systems that make computers better at specialized tasks such as game playing, video editing and wireless Internet surfing.
Analysts said the acquisition, expected to close in the fourth quarter, was the biggest bet yet by AMD Chief Executive Hector Ruiz as he tries to challenge the dominance of Intel, which has about 80% of the global semiconductor market.
“It definitely improves AMD’s competitive position against Intel because now they can answer Intel’s platform challenge with a platform challenge of their own,” said Nathan Brookwood, principal analyst of semiconductor consulting firm Insight 64.
Under pressure from AMD, Santa Clara, Calif.-based Intel is building its strategy around platforms such as Viiv for entertainment and Centrino for mobile computing.
Graphics cards like those made by ATI are lucrative PC components that render images for computer games and videos. Demand has grown as gamers expect high-end graphics and high-definition video proliferates on the Web.
“This is definitely a game-changing event, not only for our shareholders but for our customers, channel partners and end users,” said Patrick Moorhead, AMD’s vice president of advanced marketing.
But investors signaled AMD’s challenges in making the deal pay off. AMD shares slid 87 cents to $17.39. AMD’s stock has plummeted since it hit a 52-week high of $42.70 in March. Shares of ATI, which is based in Markham, Canada, rose $3.11 to $19.67.
“We believe this acquisition was extremely dilutive to the AMD shareholders,” said John Lau, senior semiconductor analyst with investment bank Jefferies & Co. in New York. “While strategic in its long-term focus, the short-term impact on AMD was significant because they had to borrow a large amount of money to finance it.”
AMD plans to borrow about $2.5 billion and issue 57 million new shares to help pay for the purchase. The company had about $2.5 billion in cash at the end of June. The deal calls for ATI shareholders to receive $20.47 ($16.40 in cash and 0.2229 of an AMD share) for each ATI share they own.
ATI posted 2005 sales of $2.2 billion, but Lau estimated that as much as $400 million of that came from Intel. He predicted that revenue stream would disappear once AMD finishes the acquisition.
“It’s clearly a complex transaction,” Intel spokesman Chuck Mulloy said. “ATI has been working with us, but we’re not exactly clear what it means. Clearly Wall Street and shareholders for ATI need to evaluate it as well.”
Despite potential risks, AMD faced increasing pressure to diversify. The company, analysts said, needs to offer more than basic silicon chips.
“I don’t think this is a matter of the market being changed by AMD and ATI’s merger,” said Shane Rau, an analyst with technology market researcher IDC. “I think it’s AMD and ATI bending to the dynamics of the market. These companies supply silicon into the PC market, which as been undergoing consolidation now for a long time. At the silicon level, you see more functions coming together.”
The merger leaves Santa Clara-based Nvidia Corp. as the remaining major independent supplier of graphics cards. Nvidia shares rose 10% on Monday.
AMD said it was not worried about driving Nvidia into a merger with Intel.
“Intel has a track record for taking partners in, getting what they want out of them, then spitting them out,” AMD’s Moorhead said. “There’s a proven track record that you’re not going to run into Intel’s arms if you want to make money. I don’t think anyone believes for a second that Nvidia’s going to run to Intel for comfort.”
